Housing Bubbles and Policy Analysis

Pengfei Wang, Jing Zhou and Jianjun Miao
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Jing Zhou: HKUST

No 1056, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper provides a theory of credit-driven housing bubbles in an infinite-horizon production economy. Entrepreneurs face idiosyncratic investment tax distortions and credit constraints. Housing is an illiquid asset and also serves as collateral for borrowing. A housing bubble can form because houses command a liquidity premium. The housing bubble can provide liquidity and relax credit constraints, but can also generate inefficient overinvestment. Its net effect is to reduce welfare. Property taxes, Tobin's taxes, macroprudential policy, and credit policy can prevent the formation of a housing bubble.

Date: 2015
New Economics Papers: this item is included in nep-dge and nep-ure
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